My daughter and her partner are looking to buy a house. They have asked me to give a guarantee to them, but I’m not convinced. I don’t think it’s a wise idea as I don’t know exactly what’s involved in a guarantor loan? Can you let me know what are the things that I need to consider before giving them a guarantee?

Guarantor home loans are now the only way to borrow between 100% and 110% of the purchase price of a property. Plus, they don’t have to pay any Lenders Mortgage Insurance (LMI).

These loans have become very popular in recent years as they cost less than standard home loans, they allow clients to buy without a deposit and some lenders now will enable them to limit the size of the guarantee.

Regarding the responsibilities of a guarantor, they seem quite significant on paper since you would ultimately be responsible for paying off their mortgage if they default.

However, the guarantor can choose to limit the size of the guarantee using a limited guarantee. It means that you’re only liable for up to an amount agreed upon by you and the lender. You can calculate the size of the guarantee using this calculator.

Also, once the loan amount is significantly reduced to around 80% of the property value, the guaranteed property can be removed as well.

This shouldn’t be a problem considering that some of our lenders can still secure a guarantee on the guarantor’s property, provided that they have sufficient equity.

Lenders usually use a second mortgage to do this.

However, lenders will only consider this if the total debt secured on the guarantor’s property is less than 80% of the value of their property.

For instance, you have a mortgage with $300,000 owing and you need to give a limited guarantee of $100,000. The total debt secured on your property will be $400,000.

To be eligible for a guarantor loan, your property needs to be worth at least $500,000.

Call us on 1300 889 743 or complete our free assessment form to talk to one of our mortgage brokers who can get you competitive rates for your home loan application. Or, you can ask your daughter to give us a call.